Summer School 6: When the markets need a designer

Summary

Planet Money – Summer School 6: When the Markets Need a Designer

Released August 13, 2025

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Introduction to Market Design

In the latest episode of Planet Money, hosts Jess Jiang and Robert Smith delve into the intricate world of market design, a fascinating branch of economics focused on creating and improving markets to ensure they operate efficiently and fairly. Jess introduces the concept by emphasizing the ubiquity of markets—from ancient trade of wheat and shells to modern digital marketplaces like dating apps. However, Jess also highlights that markets can sometimes malfunction, leading to greed, risk, and the need for government intervention.

Notable Quote:

Jess Jiang [00:07]: "Today we boldly go into the arena of competition known as the market... The invisible hand made visible."

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Understanding Market Failures

To shed light on how markets can go wrong, Jess brings in Professor Alex Teitelboim from the University of Oxford. Together, they explore common issues such as information asymmetry—where one party has more or better information than the other—and collusion, where market participants conspire to manipulate prices.

Notable Quote:

Alex Teitelboim [02:01]: "Well, you might say that all happy markets are alike, but all unhappy markets are unhappy in their own way."

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Case Study 1: The Alaskan Halibut Fishing Derby

The first major case study focuses on Homer, Alaska, where a government-imposed 24-hour fishing derby was introduced to prevent overfishing of halibut. The derby required fishermen to catch as many fish as possible within a single day, aiming to limit total catch and sustain the fish population.

Key Issues:

• Safety Risks: Fishermen like Kirk Van Doren ("Carcass") recount harrowing experiences, including dangerous weather conditions that led to life-threatening situations.

  Notable Quote:

  Kirk Van Doren [08:07]: "All of a sudden we took one and we're not coming back up rail buried water's all over deck and I'm like, mark, get up, we're going down." [08:07]

• Economic Strain: The intense competition often resulted in high personal stakes, with some fishermen losing significant earnings due to bad luck or accidents.

• Fairness Concerns: Critics like Clem Tillian, a 90-year-old fisherman and fisheries council member, argued that the system unfairly favored boat owners over deckhands, leading to social unrest and violence.

Government Intervention: In response to the derby’s flaws, the government shifted from time-based limits to quota-based allocations, where each boat owner received a specific halibut quota. This system aimed to ensure sustainable fishing while reducing the perilous competition inherent in the derby model.

Improvements Observed:

• Sustainability: Overfishing was curbed, and fish populations stabilized.
• Safety: The death rate among fishermen significantly decreased as the pressure to catch large quantities in a short time lessened.

Notable Quote:

Clem Tillian [10:44]: "It was murder by government, you might say." [10:44]

However, the transition was not seamless. The quota system introduced its own challenges, particularly around fair distribution, leading to discontent among deckhands who felt excluded from the benefits enjoyed by boat owners.

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Case Study 2: The Spectrum Auction Flaw

The second case study examines a complex spectrum auction orchestrated by the Federal Communications Commission (FCC) to reallocate TV frequencies for burgeoning cell phone use. Designed as a two-sided simultaneous incentive auction, the process aimed to maximize government revenue while efficiently distributing valuable electromagnetic spectrum resources.

Auction Design:

• Participants: TV station owners (sellers) and telecommunications companies (buyers).
• Mechanism: Owners set reserve prices for their frequencies, while buyers bid for them simultaneously.

Flaw and Exploitation: Despite the sophisticated design intended to prevent manipulation, private equity firms exploited the system. By strategically holding out on certain frequencies, these firms artificially inflated prices, securing substantial profits at the expense of the auction’s intended fairness and efficiency.

Notable Quote:

Glenn Weil [27:14]: "That requires writing some, like, enormously complicated computer code to, like, do all of that Rubik's Cube solving." [27:14]

The aftermath revealed that while the government profited approximately $7 billion, private firms extracted an additional hundreds of millions by navigating the auction’s complexities. This incident underscores the persistent challenge of market power—where dominant players can influence market outcomes to their advantage.

Notable Quote:

Clem Tillian [10:56]: "It was murder by government, yes." [10:56]

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Insights from Market Design

Professor Teitelboim provides a deeper understanding of the underlying economic principles highlighted by these case studies:

1. Tragedy of the Commons: Both cases illustrate how individual self-interest can lead to collective detriment. In the fishing derby, overfishing threatened the halibut population. In the spectrum auction, unregulated bidding practices jeopardized fair resource allocation.

2. Market Power: The ability of certain participants to manipulate market conditions highlights the importance of robust regulatory frameworks to maintain market integrity.

Notable Quotes:

Alex Teitelboim [18:04]: "That's the tragedy of the commons happens when individuals... depleting a shared resource." [18:04]

Alex Teitelboim [34:05]: "Market power is when a single market participant can influence the outcomes of the market in their favor at the expense of efficiency." [34:05]

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Lessons in Market Design

Jess and Alex conclude by outlining key strategies to design effective markets:

• Encourage Competition: A higher number of participants can reduce the likelihood of any single entity exerting undue influence.

• Ensure Informed Participants: Transparency and information parity help prevent advantages based on asymmetric knowledge.

• Prevent Collusion: Regulatory measures and oversight are essential to deter conspiratorial behavior among market players.

• Transferable Quotas: As seen in the fishing and spectrum cases, making allocations transferable can enhance market efficiency but may introduce new challenges related to fairness and power dynamics.

Final Thoughts: Effective market design requires a delicate balance between regulation and freedom, ensuring that markets are both efficient and equitable. The episode underscores the essential role economists play in crafting systems that navigate the complexities of human behavior and resource management.

Notable Quote:

Jess Jiang [35:02]: "Alex, I feel like we've been assembling a list of what makes a great market... Something efficient and fair outcome." [35:02]

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Key Terms Defined

• Tragedy of the Commons: A situation where individuals acting in their own self-interest deplete or spoil a shared resource, leading to long-term collective loss.

• Market Power: The ability of a single or a group of participants to manipulate market outcomes to their advantage, often at the expense of others.

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Conclusion

Planet Money effectively illustrates the complexities of market design through real-world examples, highlighting both successes and pitfalls. By understanding these dynamics, listeners gain valuable insights into how markets function and the critical importance of thoughtful economic policies to foster fair and efficient trading environments.

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For more in-depth analyses and economic discussions, subscribe to Planet Money+ for bonus content and sponsor-free episodes.

Transcript

[Robert Smith]

This is Planet Money from npr.

[Jess Jiang]

Welcome back, everyone, to Planet Money Summer School, Government Edition. The only economics degree you can get at 1.7 times normal speed. Very efficient, saves a ton of time. Today we boldly go into the arena of competition known as the market. In economics, a market is a place, even virtual, where buyers and sellers interact to exchange goods or services. And economists love markets. It's like all of our supply and demand graphs have come to life. People buying, people selling, shouting out prices. Wherever humans have congregated, markets have formed. Thousands of years ago, it was trading wheat and shells and copper. Hundreds of years ago, stock markets formed. Everything you buy goes through some sort of marketplace. Your cup of coffee came from trading in the bean markets. Your spouse might have come from the dating marketplace. On the apps, even kids will tell you one Snickers is worth at least two Twix. It's a law of nature. But sometimes, as we'll see today, markets can go terribly wrong. Greed can run out of control. Lives can be at risk. That's when the government often steps in. It gives the market a little nudge to work better. This is class number six, market design. This is such a cool and interesting area. We wanted not just a professor to help us along, but a market designer. The invisible hand made visible.

[Alex Teitelboim]

My name is Alex Teitelboim and I'm a professor of economics at the University of Oxford in England.

[Jess Jiang]

I bet in England you don't need to say the in England part.

[Alex Teitelboim]

Not every time.

[Jess Jiang]

So, Alex, as a market designer, you are often brought in to look at a particular market and see if it can be run more efficiently. So what are you looking for?

[Alex Teitelboim]

Well, you might say that all happy markets are alike, but all unhappy markets are unhappy in their own way.

[Jess Jiang]

Very literary of you. Yes. So let's think a moment about making sure that a market works effectively. Let's just say I'm in Istanbul and I go into their famous market there, where they spot me immediately as a tourist, and the negotiations begin. What can go wrong in a market for an individual?

[Alex Teitelboim]

Well, in this particular market, what might happen is that you've got no idea what it is that you're buying. One of the things that makes markets work badly is that some participants have the information about what's being traded and others don't. So a really famous example that economists love is buying a secondhand car. The guy who tries to buy the secondhand car has no idea really how good the car is. And of course, the seller does. And economists like to point out that this can be a real problem because anybody you really end up trading with might be selling you a clunker.

[Jess Jiang]

There can also be collusion in a market. As I wander in looking for the rug I want to bring back from Istanbul, all of the sellers could have agreed. Hey, the moment you see a tourist, make sure you double the price.

[Alex Teitelboim]

Exactly right. So if these traders can get together and they can watch each other and can make sure that nobody's going to undercut, they can all agree to offer you a really high price.

[Jess Jiang]

So we have these things that can go wrong in markets, and they get way more complex than the ones that I've brought up. How can you design a market so bad things don't happen?

[Alex Teitelboim]

Well, we try to make sure that the things that make markets work well work well. So we often try to encourage competition. We try to make sure that the participants are informed. We try to figure out ways of preventing collusion. We try to make sure that the participants actually get together at the same time. That amazing bazaar you talk about in Istanbul, one of the things that makes it work really well is everyone is there at the same time under the same roof. That makes a market work better than if the traders were scattered all over Istanbul and you would have to go around and look for one or the other. So that's the kind of thing we try to do. We try to get everyone under the same roof. We've got to make sure that there's enough competition, and we try to make sure that everyone is as well informed as anybody else.

[Jess Jiang]

Is it fair to say that a good market maximizes the number of people who are happy at the outcome? Is happiness involved market participants?

[Alex Teitelboim]

Being happy is very important because in the end, most market participation is voluntary. If a market doesn't work well, people can leave. And markets that work well, they attract more people to come and join them. So often the proof is in the pudding. You can see a market working well when the participants are happy being in that market.

[Jess Jiang]

But of course, it wouldn't be an exciting episode of Planet Money if everyone was happy all the time. Today we will have two case studies of markets that are not working quite right. One involves a secret flaw that allowed some smart people to make millions of dollars. The other case study is a market that quite literally killed some of its participants. We will take you fishing after the break.

[Robert Smith]

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[Jess Jiang]

Back in the marketplace of knowledge. Happiness guaranteed. But I hope you have your rain slicker with you because we are headed next to Alaska, specifically to to the fishing fleet based in the town of Homer. Working on a fishing boat in Alaska is one of the most dangerous things you can do for a living, and today we will see why. Alex teitelboim what should our students be paying attention to in this story?

[Alex Teitelboim]

As you listen to this, just think about what rules are in place that are encouraging this very dangerous behavior by the fishermen.

[Jess Jiang]

This episode Originally aired in 2015. It was hosted by Jess Jiang and me, and it told the story of how in Alaska, experts were worried about overfishing of halibut. So they had a great idea. Limit the number of days you can legally fish. The windows for fishing got shorter and shorter until they would open fishing for only 24 hours. They nicknamed it the derby because you competed to get as much fish as you possibly could in just 24 hours. What kind of person would go out in a tiny little boat in miserable, dangerous weather to catch fish for 24 hours straight? Everyone just Jiang told me that most everyone in Homer, Alaska wanted to do this.

[Robert Smith]

You can pretty much grab anyone on the fish dock and they would tell you these crazy stories about the derby days. Like I met Kirk Van Doren. He goes by the name Carcass.

[Jess Jiang]

Carcass?

[Robert Smith]

Yeah, he kind of looks like a Carcass. He's wiry, thin with crazy hair and he's a deckhand. He works on other people's boats. And Carcass told me the reason the derby got so dangerous was because the government chose what day it was months in advance way beforehand.

[Jess Jiang]

They didn't know the weather when they.

[Robert Smith]

Chose the day, and that meant the weather could be really bad and you would still go out. Carcass remembers one really bad day.

[Kirk Van Doren]

Well, I was on watch and I'm just sitting up there thinking, man, it was a 1912 old wood boat. How nice the boat was taken. These waves, we're in like 45 to 50 footers and I mean, they're huge. And this is a little 52 foot boat. We got big curlers, you know, and we're going, I'm going, I'm going to take it. Pretty nice.

[Robert Smith]

Feeling pretty good. Oh, yeah, he's feeling so good because the fishing had been really, really great. And that meant he was gonna get a share of that catch. And he thought he could get about $15,000. He had even picked out what he was gonna buy a new truck.

[Jess Jiang]

So that's what he's thinking.

[Robert Smith]

But the next wave came.

[Kirk Van Doren]

All of a sudden we took one and we're not coming back up rail buried water's all over deck and I'm like, mark, get up, we're going down.

[Robert Smith]

Carcass grabs the crate with the life raft and pops it open.

[Kirk Van Doren]

And a big wave came and washed the life raft overboard, the brand new one.

[Robert Smith]

The wind was blowing 100 miles per hour and they decide to jump, swim for that lifeboat that was being swept away. They haul themselves inside.

[Kirk Van Doren]

Then we hear it's the Coast Guard airplane. And I'll tell you, the most beautiful sound in the world is a C130. That's when you really think you're going to survive.

[Robert Smith]

You know, Carcass and the three other guys, they all make it back. They all survive. They just don't have the fish anymore. They don't have the money. And Carcass was not getting a new truck. But the crazy thing about Carcass is he goes back every year. He's told me he sank five times.

[Jess Jiang]

Five ships have gone down under Carcass.

[Robert Smith]

Five ships have gone down and he still goes back.

[Jess Jiang]

Man. The lesson is, do not go out with Carcass.

[Robert Smith]

I will never go out with Carcass. I know that for sure.

[Jess Jiang]

You know, I've been to Alaska and you talk to these guys and the bravado really is stunning. The ability to just keep going out and out and out again.

[Robert Smith]

It amazes so many people. And even old time fishermen like Clem Tillian, he's 90 years old now and he fished for decades. He was looking at all these sinkings and just wondering why.

[Clem Tillian]

Young men loved the action, the excitement. It was going like Las Vegas. You went roaring out into these storms and you caught all you could catch.

[Jess Jiang]

Clem was on the fisheries council at the Time. His job was to help protect the fish population. And the 24 hour derby was in fact, really good at protecting fish because the catch was limited by the number of minutes in a day. No one was overfishing. But he started to worry that the rules the government had set up were basically encouraging all these young men to.

[Robert Smith]

Take risks and there were real consequences. For every thousand fishermen that went out, three didn't make it back.

[Clem Tillian]

It was a very stupid system. It was murder by government, you might say.

[Robert Smith]

Murder by government, yes.

[Clem Tillian]

And a few of us were looking at other ways of doing it.

[Robert Smith]

There was an idea out there, a way to protect the fish and make fishing safer. Instead of limiting the amount of time people fish, limit the total amount of fish that could be caught if you were a fisherman.

[Jess Jiang]

Instead of having to fish in these 24 hour sprints, this crazy race, Clem wanted a system where it would be basically leisurely because each fisherman would be guaranteed a certain amount of fish at the beginning of the season.

[Robert Smith]

It was this simple solution, but anytime you distribute something valuable, you know people are going to fight over it.

[Jess Jiang]

Clem thought that the catch should be distributed among boat owners and captains. And his thinking was, those are the people who have invested a lot of money in boats and gear and so they should reap the reward.

[Robert Smith]

But when guys like Carcass heard about this plan, they got pissed. Karkus didn't own a boat. He was a deckhand. He worked on someone else's boat, hauling in the fish and risking his life.

[Kirk Van Doren]

And it was a real ridiculous thing that each one of us crew members shouldn't have got our share of it. You know, it's like the owners knew what was going on. The owners kept it to themselves.

[Jess Jiang]

You could see why they would be so upset. Under the old 24 hour derby system, the fish went to the people who worked the hardest. The fish went to the people who took the most chances. That sort of frontier mentality. But now the government was coming in and saying, you are winners and you are losers. The boat owners, clearly the winners, the boat owners were gonna be rich.

[Robert Smith]

And the deckhands like Carcass, they weren't going to get anything. They were being left out of the system. They could fish and they could still work, but they weren't going to get a guaranteed share of the catch.

[Jess Jiang]

So you can understand why. The losers, the deckhands basically confronted the Fishery Council. They confronted Clementilion.

[Clem Tillian]

There were mass demonstrations in some towns and my niece had her tires slashed and my kids got beat up in the Playground. I mean, it was violent.

[Robert Smith]

Your kids got beat up.

[Clem Tillian]

Yeah, because they were trillions kids, you know? And that was just one of the things that happened. When people don't like something, they can get pretty mad about it, especially when it's their livelihood. And I was rearranging their whole livelihood.

[Jess Jiang]

Now, Clem and the Fisheries Council did look at other ways that could be considered more fair. They looked at a lottery system where everyone gets an equal, equal chance of.

[Robert Smith]

Getting the fish, or an auction where the permits went to the highest bidder, but no one wanted to pay for something that they had always gotten for free.

[Jess Jiang]

And so, with no better option, Clem drafted the proposal. Here's what they were going to do. Fish scientists would estimate how many halibut there were in the sea, how many could be safely caught. Then the boat owners would each get a share of the fish. No more race, no more derby. It went into effect in 1995, and.

[Robert Smith]

When I visited Homer harbor, you could see how different it was compared to those derby days. When I wanted to go out fishing, I didn't have to wake up super early. I didn't have to race. I just called up a boat owner and she said I could come anytime. No rush. So this is the boat.

[Jess Jiang]

This is us.

[Alex Teitelboim]

This is our little boat.

[Robert Smith]

This is Christy and David Fry, and they tell me they have 1700 pounds of halibut to fish. That's their quota for the whole year.

[Jess Jiang]

And that's very specific. 1700? How'd they come up with that?

[Robert Smith]

The government looked at how much fish the fries caught in those old derby days, and they took an average and used that to calculate their share.

[Jess Jiang]

Now, it's easier to enforce a time limit, 24 hours than it is to enforce a very specific number, like 1700 pounds of halibut. How do they enforce it?

[Robert Smith]

David says there would be these federal agents from NOAA and they would police the docks.

[Jess Jiang]

When they implemented this system, they just figured everybody was gonna be a criminal, I guess. So that brought the feds into it. So that mean there had to be guys with flak jacks on and guns and, like, you know, come down to my boat on my boat with a damn gun and a flap jacket. You're lucky you didn't go in the water, man. And boy. It just pissed me off.

[Coleman Bazelon]

They're damn lucky.

[Jess Jiang]

I was afraid of them. I know Alaskans are big into their freedom, and I'm sure at first this fishing quota seem like this, like, straitjacket on what they did on the whole freedom swashbuckling. Fishing vibe.

[Robert Smith]

It did. People were not into it at first, but soon fishermen saw the advantages. If the weather was bad, they could just stay at home. If you don't want to fish all season, you can take a break and lease out your quota. You can have someone else fish it. That sounds like a good sound. When it starts, the Fryes drive the boat out of the harbor. You don't see another commercial fishing boat for the whole day. And that, by the way, is the whole point of the new system now that people can trade or sell away their quotas. Some boat owners have taken this easy money. They've given their fish to someone else and have totally gotten out of the business. The number of fishing boats is only a third of what it was before. And the theory is the only people left are the best and most efficient fishermen.

[Jess Jiang]

Fish, fish, fish. Fish keeper. Slow down, dude. Beating that with a club.

[Robert Smith]

No, they're like one big muscle, and they're just trying to, like, get out of the boat. Oh, he's a fighter.

[Jess Jiang]

They're lively.

[Robert Smith]

When it's shallow water, gigantic Christy puts a knife through the gills and then quickly removes the guts. She says in the past, during the derby days, she didn't have time to take care of the fish like this. She just threw all the fish on ice and hoped everything stayed fresh.

[Jess Jiang]

So it's better to gut it on the boat.

[Robert Smith]

It is so much better. She says. It's more delicious.

[Jess Jiang]

Okay, so the halibut quota system seems to be doing exactly what it was designed to do. The fish are more delicious. It's preventing overfishing, and. And the death rate for fishermen has plunged.

[Robert Smith]

The key question is fairness, and you can see from the Alaska case that it is really hard. It took 20 years for the fishermen to get used to this system, and there was only a couple thousand of them. And they still grumble about how it all shook out.

[Jess Jiang]

I mean, it's still, at its core, a really difficult job.

[Robert Smith]

When I went out with Christy and David, they only caught six fish all day long, the whole day. The thing is, now they can go out tomorrow.

[Coleman Bazelon]

I guess we'll see what happens.

[Jess Jiang]

Fishermen are eternal optimists. That was Planet Money editor Jess Jiang out on the fishing boat in 2015. We're back now with our professor, Alex Teitelboim. Professor, the fishing market is interesting because the problem is so obvious. A totally unregulated market wouldn't work. They would just catch every last halibut. There would be none left. This is the classic collective action problem. We Always talk about here on Planet Money.

[Alex Teitelboim]

Well, it's a fishery. And so the problem that often happens in fisheries is what we call the tragedy of the commons.

[Jess Jiang]

Ah, famous one.

[Alex Teitelboim]

That's right. And the tragedy of the commons happens when individuals, fishermen here, they're acting in their own self interest. They're trying to catch as much fish, make as much profit, but they end up overusing and depleting a shared resource, which is the fishery. So when I go out to fish, I get as much fish as I can, but that slows down how much fish is able to reproduce. And so that means that you, Robert, who might also be a fisherman, is not able to catch as much fish.

[Jess Jiang]

And one of the important things about the tragedy of the commons is it's not because people are terrible. Right? It's not because like I want to hurt everyone else.

[Alex Teitelboim]

Absolutely not. People are acting in their reasonable self interest. These fishermen are commercial fishermen, they're trying to make as much profit as possible, but their individual actions turn out to be against the long term interest of the fishing community. So they could all be better off by fishing less, but it requires all of them to coordinate and fish a little bit less.

[Jess Jiang]

So we have this great example in the fisheries, but we see this in our everyday life. I mean, this happens everywhere, right?

[Alex Teitelboim]

Yeah, we see it in everyday life. I have two kids, one is four, the other one is almost three and they go to nursery and during break time they go out into the little yard and they play. And there are a lot of different toys and some of the toys are really nice and some of the toys are not so good. But what you often see kids do is that they end up fighting over or because they're British kids, they often queue up for the really nice toys. And at the end of break time, some of the kids end up not playing with any toys at all.

[Jess Jiang]

This must break your heart as a father and as a market designer. You're like, there need to be rules here.

[Alex Teitelboim]

Absolutely. So every time I go and see them play, I just think, hey, it would be so much better if we just shared out the time. Everyone could get a bit of time on each toy. You wouldn't have to queue and wait quite so long. You could all have a really good time playing with some of the toys. But they're so keen to get this one particular toy, they all end up hurting themselves.

[Jess Jiang]

They always ignore the economists, even as toddlers.

[Alex Teitelboim]

That's exactly right. It really doesn't help having a dad who's an economist.

[Jess Jiang]

So in the Alaska Story. When the Fisheries Council realizes how dangerous the market is, the they step in and do two things. They allocate the resource. They say this is how many fish you can take. But then they make that share transferable. And it seems to me like this is the key thing. If, if someone like me, Robert Smith, got the quota, it would take me weeks just to catch one fish. But if I can sell my quota to someone else, like Carcass, maybe then he can, in theory, catch the fish much quicker than I can.

[Alex Teitelboim]

That's right. And this is what we've seen in the practice of using these kinds of transferable quotas is that in markets where they have been introduced, you end up with much bigger boats, with a lot fewer people fishing, and you often end up catching fish at a much lower cost.

[Jess Jiang]

This principle, of course, can be seen in all sorts of markets. There are tradable quotas for water in some places in the west, for instance, so that farmers and cities can balance out who can move most effectively use water from a limited source. And we've seen governments cap pollution, but allow factories to trade the quotas. So there's an incentive to clean up your smokestacks. We'll be back with our professor after our next case study that brings us into the world of auctions. In fact, it is the mother of all auctions. And some people figured out how to hack it after the break. Welcome back, students. A market is a place where buyers and sellers interact. And one great way to do that is through an auction. And boy, do we love auctions. Here at Planet Money, we've been out to farm equipment auctions, Christmas tree auctions. We even considered auctioning off eggs a few months ago. But this next case study is perhaps the largest, most complicated auction we have ever talked about. And it had a fatal flaw. Keith Romer and I told the story in 2020.

[Coleman Bazelon]

Ron Bruno worked in TV his entire life.

[Jess Jiang]

I used to work at a CBS affiliate right here in our hometown of Pittsburgh, which was when Ron decided he might as well start running his own TV station. He partnered with a woman named Debbie Goodworth and built 11 stations. And hence we became the Bruno Goodworth Network. WBGN. Ron Bruno was the president. He prided himself on broadcasting local events.

[Coleman Bazelon]

They showed reruns of Cagney and Lacey in a show called US Bounty Hunters. On Saturday nights, there was a horror movie show called It's Alive. The local commercials were incredible.

[Devin Meller]

This portion of It's Alive is brought to you by Ralph's Army Surplus. Ralph's Army Surplus, located In the center of Monroeville, penns.

[Jess Jiang]

As soon as you enter the store.

[Devin Meller]

You'Ll be facing one of the area's.

[Jess Jiang]

Largest selections of new and used army.

[Devin Meller]

Apparel, including the new digital camo design.

[Jess Jiang]

Oh, digital camo. Is that all? But that's not all. Ralph's has camping equipment, tents, sleeping bags, knives. So much to choose from. You'll be blown away.

[Coleman Bazelon]

Was it a fun job? Did you like the job?

[Jess Jiang]

Oh, yeah. TV's in my blood. But seven or eight years ago, Ron got a mysterious phone call. It was from a broker representing an unnamed buyer. The broker asked, was there any chance you might consider selling wbgn?

[Coleman Bazelon]

Did they say why they wanted to buy your stations?

[Jess Jiang]

No, no, no, of course not. But Ron had heard rumors from other small TV station owners across the United States. Private equity firms, Wall street guys were buying up mom and pop TV stations.

[Coleman Bazelon]

Ron was not going to be lowballed on the price by some finance guy in a fancy suit. He haggled with the broker. They finally settled somewhere north of $7 million. Ron didn't want to tell me exactly how much. And that was it. Ron was done with wbgn.

[Jess Jiang]

Normally, private equity firms specialize in buying up poorly run businesses, fixing them up, and selling them again. But that is not why the buyer wanted ron station. They didn't want the high school football games and that sweet, sweet ad money from Ralph's army surplus. They wanted something much more valuable. A chunk of the electromagnetic spectrum. Allow me to explain. The airwaves around us are like a superhighway. Each radio station gets its own frequency, its own lane on the highway. Also, TV stations, like Ron's, they get their own lanes, their own frequencies. Now, in the old days, you could just apply for a frequency. And the fcc, the federal communications commission, would give out radio and TV stations. Using a lottery system, A dentist could win the TV frequency in Boston and then end up selling it for a lot of money. It was not an ideal system.

[Coleman Bazelon]

Then an even bigger problem starts to crop up for the fcc. Because the airwaves, the superhighway in the sky, it was becoming more and more crowded. They were running out of lanes.

[Jess Jiang]

The reason was the object you might be holding in your hand at this very moment. The cell phone. The cell phone uses the same frequencies as TV stations. And for years, the cell phones sort of squeezed between other people's freque, like a motorcycle through a traffic jam.

[Coleman Bazelon]

But cell phones, as you may have noticed, started to demand more and more bandwidth.

[Jess Jiang]

1G, then 2G, 3G, 4G, LTE 5G. Where were all the cell phone signals going to go when the airwaves were crowded with Cagney and Laci reruns and high school football games? There wasn't room for everything.

[Coleman Bazelon]

Eventually, the problem got so bad that the FCC decided they had to figure out a way to. To basically tear down the superhighway with all the TV stations and all those lanes and just build a new one from scratch.

[Jess Jiang]

This is a classic problem in economics. How to reallocate a scarce resource to the people who will make the best use of it. Ladies and gentlemen, may I introduce you to the solution. An auction. For decades, the FCC had been playing around with auctions to sell the TV frequencies instead of just giving them away to dentists. But. But in order to really free up a lot of room in the air for the cell phones, they were going to need the mother of all auctions.

[Coleman Bazelon]

And there is this branch of economics called auction theory. And they have all these cool little variations on the basic auction format. Some auctions are blind. You don't know who's bidding what. Some auctions are not for buyers, where the price goes up and up and up, but actually reverse auctions for sellers, where the price goes down and down and down until there's only one seller left.

[Jess Jiang]

This new auction would need to be a mashup of all of these. An auction that would coordinate between hundreds of TV stations who had frequencies they might consider selling, and all these cell phone companies that might just want to buy so many different transactions.

[Glenn Weil]

It was a complicated problem to solve because they decided they wanted to do everything all at once.

[Coleman Bazelon]

This is Glenn Weil, former professor at the University of Chicago. Big time auction enthusiast.

[Jess Jiang]

Glenn says that this new auction needed to completely reimagine the spectrum superhighway.

[Glenn Weil]

And that requires writing some, like, enormously complicated computer code to, like, do all of that Rubik's Cube solving.

[Jess Jiang]

So each owner of, of, let's say a TV station had to decide if they wanted to sell it for how much. Like a, like a secret. A secret number. Is that right?

[Glenn Weil]

Exactly. The minimum amount that they would require to sell it.

[Jess Jiang]

Okay. And then these telecommunications companies, the cell phone companies, they had to decide what frequencies they wanted and how much they were willing to pay.

[Glenn Weil]

Exactly. That sort of creates a kind of supply and demand. And if those sort of intersect and leave enough money for the government, then you say that the auction is over. And it worked out.

[Coleman Bazelon]

To pull this off, the FCC turned to a team led by maybe the greatest auction designer in the world, an economist Named Paul Milgram. It was so complicated that it took years to set up the rules and all these super powerful computers to run the calculations.

[Jess Jiang]

They called it a two sided simultaneous incentive auction. Two sided because there was an entire market of players buying and selling simultaneous because everyone was bidding at once and incentivized because it was designed to bring every last TV station to the table.

[Coleman Bazelon]

And it was the most glorious thing anyone had ever seen.

[Jess Jiang]

There were all these built in incentives for both buyers and sellers to just set their prices based on how they actually valued their licenses. It was market efficiency, impossible to outsmart.

[Coleman Bazelon]

Glenn Weil says he was at work when he figured out that was not in fact the case.

[Glenn Weil]

I have a very, very clear memory. I was in a seminar at Microsoft Research where I worked at the time, and there was a presentation by someone who was a colleague of mine and who was involved in the auction design. And he was saying, oh, this auction can't be gamed in the following ways and so forth. And someone in the audience raised their hand and said, what do you mean it can't be gamed? One of my friends is making a bunch of money exploiting the auction.

[Jess Jiang]

The players who were exploiting the auction were private equity and the smart people they hired to figure out how to make a lot of money. My name is Coleman Bazelon and I'm.

[Alex Teitelboim]

An economic consultant with the Brattle Group.

[Jess Jiang]

During the big spectrum auction, the two.

[Coleman Bazelon]

Sided simultaneous incentive auction, let's just call.

[Jess Jiang]

It the super bowl of auctions. Coleman was advising one private equity firm, although he won't use that term and he won't say which one.

[Alex Teitelboim]

I worked for a bidder that was.

[Jess Jiang]

On the television station side that bought television stations to bid into the auction. Somebody who bought TV stations for the sole purpose of selling them into this auction.

[Alex Teitelboim]

Yes.

[Coleman Bazelon]

He may have been the one who advised the private equity firm that bought wbgn, Ron Bruno's station in Pittsburgh. Coleman didn't say. He's very discreet.

[Jess Jiang]

We've been using this metaphor of a superhighway in the sky. And, and you know how whenever someone wants to build a highway in the real world, there's always some rundown farmhouse in the way that doesn't really want to sell. And the government has to pay way too much money for that farmhouse. The private equity firms, they essentially bought all these key farmhouses, these key pieces of the spectrum, blocking the new spectrum superhighway.

[Coleman Bazelon]

But the plan was not to stop the highway to block the auction altogether. It was just to make it more expensive. Private Equity and their consultants figured out which frequencies the FCC's computers valued the most, the frequencies you really needed to make the whole reorganization work. Once you had those, you could drive up the prices for all the TV stations which private equity happened to own.

[Jess Jiang]

A lot of the game was on March 29, 2016, the start of the most complicated auction in the history of humanity, and one of the longest. By the time all the buying and selling and bidding wrapped up, a year had gone by, and it mostly looked like it worked. TV stations sold their frequencies. The cell phone companies bought them up. The US government made a profit of $7 billion. But when economists went back and looked at the numbers, they found that the private equity firms had grabbed hundreds of millions of dollars extra for themselves by spotting that flaw in the auction. By holding out on the superhighway, they had bid up the price of their TV stations. Was that fair?

[Coleman Bazelon]

I asked a version of that question to Ron Bruno, the owner of the long departed and sorely missed wbgn. And in retrospect, do you like knowing everything that you know now? Would you still have made that deal?

[Jess Jiang]

You know, that's the magic question, and I ask myself that all the time.

[Coleman Bazelon]

By the way we looked it up, those Wall street guys sold the frequency of five of WBGN's 11 stations into the auction for $74 million, more than 10 times what they paid. Ron.

[Jess Jiang]

Keith Romer reported that story in 2020. After the break, we'll ask the market designer how to spot people messing with our markets.

[Devin Meller]

This message comes from ritual. What makes Ritual vitamins different? Ritual vitamins are made with bioavailable, clinically studied key ingredients as well as the essence of Mint. Get 25% off your first purchase when you visit ritual.com NPR we are back.

[Jess Jiang]

With Alex Teitelboim, professor of economics at the University of Oxford. Alex, our story told us about something called a double auction. So in other words, there were a lot of sellers, TV stations and a lot of buyers, telecommunications companies. It sounds exotic, but there are actually a lot of examples of double auctions in our lives, right?

[Alex Teitelboim]

Absolutely. So think of the New York Stock Exchange. So in the New York Stock Exchange, the buyers submit bids to get shares, and then sellers submit asks to sell those shares. And there's transactions happening all the time. So there's many examples of double auctions. Another one's the electricity market. Generators offer to sell electricity and utilities bid to buy this electricity from them.

[Jess Jiang]

What can go wrong in these double auction markets? And we sort of hinted at it a bit in this story, well, what.

[Alex Teitelboim]

Can go wrong in this market is that some market participants would have what we call market power. And it's their ability to skew market outcomes in their favor at the expense of efficiency.

[Jess Jiang]

So an example of that in the stock market, say, is there are occasions when one giant buyer wants to accumulate a position in one company or one company wants to dump a lot of stock. That can influence the stock market. And at that point their actions can actually just change the price of one stock.

[Alex Teitelboim]

It doesn't happen in stock markets very often, but that's exactly the sort of thing that you might worry about. We usually think of markets working well and being competitive when no single participant can really meaningfully influence the price.

[Jess Jiang]

So what can you as a designer, what can we as a society do to make sure that there aren't large powerful players that are skewing the beauty of the market, the efficiency of the market?

[Alex Teitelboim]

So one thing that we often do is we encourage competition in the market directly.

[Jess Jiang]

So the more participants in the market, the better. Alex, I feel like we've been assembling a list of what makes a great market. You want plenty of competition, everyone should have the same information. You want rules against collusion, and I guess it leads to something efficient, to.

[Alex Teitelboim]

An efficient and to a fair outcome. It's not just efficiency that really matters for a lot of market design. And the reason is that market participants need to accept what the market design ultimately is. And if the market allocations are really unfair, often people might say that this design is no good and not wish to participate.

[Jess Jiang]

We're coming to the end of our class. So Alex, it's time for our vocabulary words. We talked about tragedy of the commons. What is that again?

[Alex Teitelboim]

The tragedy of the commons happens when market participants who are acting in their self interest deplete a shared resource in a way that means that's against their own community outcomes.

[Jess Jiang]

So we talked about two sided auctions like the stock market or the spectrum auction we talked about. And there's something that can ruin those kind of markets and it's called market power. What is market power?

[Alex Teitelboim]

Market power is when a single market participant can influence the outcomes of the market in their favor at the expense of everyone else.

[Jess Jiang]

Our students can take these words with them and that way when they see something wrong in the world, rather than getting upset, they can say, we should just redesign this market. Alex Teitelboim, professor of Economics at the University of Oxford in England. Thank you so much for coming in.

[Alex Teitelboim]

Thank you so much, Robert. It's a pleasure.

[Jess Jiang]

Okay, students, only one class left before our final exam and graduation ceremony. Start studying now. We'll have an online quiz and if you pass, you will receive a diploma suitable for social media bragging and legally, not much else. And for those of you in New York, hope to see you on August 18th for our live show. If there are tickets left, if you can get them in the show notes, Summer School is produced by Eric Mennel and edited by Alex Goldmark. It was fact checked by Emily Crawford. Devin Meller is our project manager and the show was engineered by Santa Lofredo. I'm Robert Smith. This is npr. Thanks for listening.

[Devin Meller]

This message comes from Square. You probably know Square from your favorite local spots, but you might not know that there's a lot more to square than meets the eye. What started as a little white card reader is now being used to rapidly scale, build loyal followings, cover cash flow gaps and expand to new locations. Wherever your business is growing, Square meets you there. Go to square.com go NPR to learn more.